R&D and productivity: Estimating production functions when productivity is endogenous

Abstract

We develop a simple estimator for production functions in the presence of endogenous
productivity change that allows us to retrieve productivity and its relationship with
R&D at the firm level. Our dynamic investment model can be viewed as a generalization
of the knowledge capital model (Griliches 1979) that has remained a cornerstone of the
productivity literature for more than 25 years. We relax the assumptions on the R&D
process and examine the impact of the investment in knowledge on the productivity of
firms.
We illustrate our approach on an unbalanced panel of more than 1800 Spanish man-
ufacturing firms in nine industries during the 1990s. Our ¯ndings indicate that the link
between R&D and productivity is subject to a high degree of uncertainty, nonlinearity,
and heterogeneity across firms. Abstracting from uncertainty and nonlinearity, as is
done in the knowledge capital model, or assuming an exogenous process for productiv-
ity, as is done in the recent literature on structural estimation of production functions,
overlooks some of its most interesting features.

Item Type:

MPRA Paper

Institution:

Universidad Carlos III, Harvard University

Original Title:

R&D and productivity: Estimating production functions when productivity is endogenous